How a Chinese cave got listed on the U.S. stock market

Wed Nov 30, 2011 11:02am EST
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By Melanie Lee

YISHUI, China (Reuters) - A Chinese tourism company listed in the United States wants investors to pour their money down a dark hole. Literally.

China's "Underground Grand Canyon," about an hour's drive outside the smoggy city of Linyi in the eastern province of Shandong, promises visitors 3 km (2 miles) of grand stalactites, multicolored lights and an exciting luge ride.

Tracing the attraction's ticket receipts back to investors in the United States proves an even more complex labyrinth to navigate. Following the trail sheds light on the lengths some Chinese businesses have gone to secure overseas listings, which bring the companies funding and prestige back home.

"For entrepreneurs, going public gives them a sense of recognition. For employees, going public gives them a sense of achievement," Zhang Shanjiu, the chairman of the company, boasted to a tourism publication four years ago as he embarked on the odyssey to list it.

The owners of the Underground Grand Canyon attraction eventually used a dizzying array of holding companies to ultimately list in the United States through a reverse merger that accomplished the feat in 2010.

That practice has come under scrutiny over the past year, as short-sellers including Muddy Waters have targeted some firms listed in the United States and Canada, publishing research reports accusing them of fraud that caused their stock prices to plummet, from which the short-sellers profited.

Some companies that listed through reverse mergers, including Chinese clean-tech firm Rino International, were eventually delisted following investigations prompted by short-sellers' accusations of accounting flaws.

The company controlling the Underground Grand Canyon in Shandong has not been accused of accounting problems and has not been implicated in any wrongdoing. However, its road to a U.S. listing presents a detailed portrait of the practice of reverse mergers.   Continued...

<p>Visitors walk past lanterns in the underground cave portion of the Underground Fluorescent park in Yishui November 4, 2011. REUTERS/Melanie Lee</p>